UPDATE 1-Brazil to take major step in cutting interest rates
By Brian Winter
SAO PAULO, May 3 (Reuters) - Brazilian President Dilma Rousseff wants to link returns on national savings accounts to the central bank's lending rate, local newspapers reported on Thursday, a risky and highly controversial move that would allow her government to continue cutting interest rates in coming months.
Rousseff has made reducing interest rates a top priority as she tries to revive an economy that has been on the brink of recession since mid-2011. The benchmark Selic rate is at 9 percent, near historic lows for Brazil but exorbitant compared to rates close to zero in Europe and the United States.
One of the biggest obstacles to bringing the Selic down further is the fixed rate of return for savings accounts, Brazil's most popular investment vehicle. The rate is currently set at about 6 percent annually, which once tax incentives and other factors are taken into account amounts to a de facto floor for the Selic at or around its current level.
Rousseff plans to scrap the fixed rate and instead peg the return on savings accounts to as low as 70 percent of the Selic, Valor Economico and Estado de S.Paulo newspapers reported, citing unnamed sources. Valor reported that existing contracts on savings accounts would not experience any changes.
A senior government official declined to confirm or deny the reports, and told Reuters that Rousseff would finalize the details on Thursday morning. The official spoke on condition of anonymity because discussions were still ongoing.
The finance ministry did not immediately return a call for comment on the newspaper reports.
The proposal, which will likely need congressional approval, carries enormous political and economic risks and amounts to a fundamental reengineering of the basic pillars of Brazil's financial system. Brazil's currency and interest rate futures markets have both been highly volatile this week as investors try to account for the changes.
"A historic decision," Andre Guilherme Pereira, an economist for Gradual Investimentos, wrote in a note to clients on Thursday. "We wish all the luck in the world to the government. They're making a really, really high-stakes bet."
The real was about 0.3 percent weaker in early trade on Thursday at 1.929 per dollar. It has shed almost 3.5 percent of its value this year as investors anticipate that lower interest rates will make Brazilian assets less attractive.
The central bank cut the Selic rate 75 basis points last month, and it is now down 350 basis points since August. In minutes from its latest monetary policy meeting, the bank left the door open to further rate cuts in coming months.
Obviously shorts have been covering with discipline from feb 15th (GFA $6) to Apr 15th (GFA $4.4) Short Interest came down consistently from 8M to 6M.
However on Apr 30th short interest bounced to close to 7M with GFA printing $3.6 (understandable, since it was threatening a breakdown ).
Unfortunately for shorts, your game changer news above (extremely bullish for balance sheet cleaners) came on first week of May. So shorts' best chance to cover below $3.6 would have been on the JPM news...but GFA finished the week near $3.8.
They may have a second chance to cover next week on a Spain Greece news but it's clear now that its getting harder to cover.
In a month or two an out of the woods upper guidance by the new management could short squeeze them to $5.
Anyone following call options please chime in if you see abnormal bids.
btw. I liked the Board of Directors guy from Caixa Economica after all gov backed loans play a huge role on cleaning Tenda.
On my btw comment above...Mind you a week ago Rio Bravo and Funcef, the pension fund of state-controlled bank Caixa Economica Federal, put forth candidates to Gafisa’s board...were they got elected?
The Minutes of the Annual General Meeting tell me whether they are married or separated...which I don't care. Do we have leverage with Caixa Economica? Tia.
"i'll take TBV over BV anyday of the week."
Absolutely no question amigo, and I agree that STD is undervalued by any sane measure right here. My only point was that it's not so cut and dry what is tangible with banks and RE companies these days.
Great. Inflection point confirmed. The ship is turning back to profitability. Ebitda
R$105m vs R$29m a year earlier.
Good points by aco above on fiscal discipline. Long term is arguably bad for Br but short term is awesome for GFA, because it helps to clean the balance sheet faster. Let other mid size builders fall in the trap of growth, they blow out long term. GFA with a solid BS will attract capital in due time.
Good afternoon Entitled.
I like the earnings report also. Good solid numbers and a nice wind-down strategy in place. Also, the BRL finally dropped to 2/1 with the USD (or close enough) today also.
I was reading yesterday about their new board of directors also, which is taking a more active role in remodeling the company's strategy.
I jumped the gun by buying yesterday at $3.90, but am a bit more serious about holding long and thinking of adding to my position here.
Here's what I really liked:
"The Ebitda margin rose to 11.3% from 3.9% in the first-quarter of 2011."
The Brazilian press also pointed out that they would have registered a profit if not for the 90 million BRL in interest payments.
"Excluindo-se o impacto da despesa de juros da dívida de 90 milhões de reais no primeiro trimestre, teríamos geração de caixa no período", afirmou a empresa no balanço.
Not disagreeing about STD. Its probably just a bounce trade right now - like GFA.
Interest rates in Brazil have gone down drastically in the past several years. They peaked around 60% during the 1999 crisis. So has access to lending. You are overlooking affordability and external shock risks though. If Spanish companies are forced to deleverage, how will that impact FDI in Brazil?
Good article here BTW. Notice the growing popularity of CDOs. Scary stuff.
Opportunity cost of hanging onto STD will be too much as the Euro grinds down to point of no return.
Housing bubble will burst only when interest rates go down a lot and home prices sky rocket like in US.
Also when 50% of the homes are financed is another topping event.
Brazil is probably a decade away from that event, you are too early.
Not disagreeing, because STD and BBVA will get thrown away with the trash. I'm also a big Euro bear, but the fundamentals on STD are being seriously overlooked.
I would argue that valuations on STD are better than GFA. Don't underestimate the future impact of this housing bubble bursting or Brazil's FDI and currency vulnerabilities.